Sunday, August 26, 2012

Industrialization, Wages and the Terms of Trade

The quote above is from Raúl Prebisch's classic paper "The Economic Development of Latin America and Its Principal Problems," the so-called Development Manifesto (available in Spanish here), published in Spanish and Portuguese in 1949, and the following year in English.

Note that his explanation for the tendency of terms of trade of commodities to fall over time (the so-called Prebisch-Singer hypothesis) was based on the fact that in the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. So in the recession, while prices of commodities and wages fell in the periphery, they didn't in the center. Class conflict, and not just technological change, was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery.

Also, note that this explanation of terms of trade suggests that if wages in the periphery fall, then the prices of commodities fall too. And it is worth remembering that a depreciation of the currencies of peripheral countries implies lower wages.

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